I have a very simple strategy when it comes to investing. I feel that great investments are born when a great company meets a game-changing trend.
Just think about the truly great stocks of our time. Sure they were all great companies, but it was a trend or a change in consumer tastes that drove growth. Whether it was Google with the Internet, or Chipotle with fast-casual dining, the trends tend to matter as much as the companies do.
The question behind great investing is a simple one, what will the world of tomorrow need?
The pet products industry: An investors best friend
One of the fastest growth industries, believe it or not, is the pet products and pet care industry. The pet product industry has nearly doubled since 2001, which makes the business of caring for our furry friends a $55 billion behemoth.
So who will win the war for your pet's dollar?
The obvious choice, in my opinion, is pet store giant PetSmart (PETM). If I were building a "pet product" portfolio, it would be my first, second, and third choice, and not just because of my familiarity with its stores.
You see, at the heart of the pet product bull, is a healthy living trend. It's becoming obvious that Americans are more concerned about their health, as well as what they put in their bodies, which is starting to extend to furry friends. We feel better when we eat well, so naturally we want our cat's and dog's to do so as well.
PetSmart is taking full advantage of the love we have for our pets. The company has grown earnings at 12%, annually for five years, recently issued positive guidance for the rest of 2013, and it also increased the dividend.
Competitors barking up the wrong tree
Just last year, Wal-Mart (WMT 1.32%) announced that it would carry an ultra-premium dog food brand, Pure Balance. While this may be a nice move for Wal-Mart, I don't see Wal-Mart being a major threat to PetSmart.
Wal-Mart has recently been trying to associate itself with a more discerning consumer. Despite what is depicted in commercials, I'd personally be outraged if a steak house bought my cut from Wal-Mart; am I the only one?
I digress, here's the point. Wal-Mart is synonymous with having the lowest prices, that's their moat, not quality. Whether it's food, or pet products, people will always think to go to Wal-Mart for a low cost option.
Even with Pure Balance, a simple view of Wal-Mart's website shows that they only have nine options for pure balance, versus forty six for Pedigree.
I feel that PetSmart is the perfect mix of large, and convenient, while still being health conscience. It's within driving distance of most consumers, but it also carries brands like Nutro, which offer grain free dog food, that most big box retailers do not.
Is Whole Food's a threat?
Like Wal-Mart's move with Pure Balance, Whole Food's (WFM) move into pet food is a good move for them, but not a major threat to PetSmart. Whole Food's recently introduced Whole Paws, a natural and organic private-label pet product line.
While I'm a fan of Whole Foods, as a customer and an investor, PetSmart has a moat that protects it from nearly all retailers.
It's simple, PetSmart offers a lot more for your pet, than just pet products.
Between its veterinary, grooming, pet hotel, and day camp services, PetSmart is the only true one stop shop for pets. Sure you could get some of the products online, or at Whole Foods, but why would you when you have to take your dog to the vet anyway?
I call PetSmart's moat the "gold-locks moat." PetSmart is a big retailer, but not too big to keep some "grain free" or natural credibility. Not too big, not too small, PetSmart is just right.
All Hail the "Pet King"
Needles to say, I'm a big fan of PetSmart. I think the company is well run, and the stock has good fundamentals, but I'd be lying if I didn't just admit that I'm fan, period.
I still believe in Peter Lynch's famous "buy what you know," investment philosophy. When I take my dog, Ramsy, to PetSmart, his reaction is similar to that of a child at Disneyland. Yet as an owner, I like that I can get his medications and food in one, convenient, place.
In short, PetSmart makes my life easier. And as an investor, I know that if I feel this way, others must as well.
